Government hits back at financial squeeze claims

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The Government today hit back at claims that families were facing a financial squeeze as a result of Chancellor George Osborne's tax and benefits changes, insisting the overwhelming majority of households would be better off.

The Treasury released figures which, it said, showed that the bottom 80% of households in terms of income would, on average, gain from the changes which come into effect today.

The financial education charity Credit Action has previously calculated that households were set to lose an average of £200 a year.

But while the Treasury acknowledged that average impact across the population was a "marginal loss", it said the figures were "heavily skewed" by the losses at the top of the income range.

It said that the top 10% of households would suffer the most as they do not gain from the increase in personal allowances and would pay the most increased national insurance contributions.

Labour meanwhile issued their own figures which, they said, showed that today's changes, combined with January's VAT rise, could leave some families more than £1,700 a year worse off.

Shadow chancellor Ed Balls said that what he called "Black Wednesday" would hit women with children hardest of all.

According to the Treasury figures, a dual-earner couple with one child and a combined income of £25,000 will be £12 a week better off, a dual-earner couple with two children on £60,000 will gain £5 a week, and a lone parent with one child on £12,500 will gain £10 a week.

In contrast, a single-earner couple with no children on £170,000 will lose out to the tune of £35 a week.

However Labour published figures compiled by the independent House of Commons Library which, it said, showed that a couple with three children, with each parent earning £26,000, would lose over £1,700 a year if the VAT rise is taken into account.

Mr Balls pointed in particular to the cut in childcare costs paid through the working tax credit which could cost some families with two or more children up to £1,560.

"Today will be a Black Wednesday for millions of families across Britain. David Cameron promised to lead the most family-friendly government ever and George Osborne said we're all in this together," he said.

"So why are their changes to tax and benefits coming into force today hitting women harder than men and taking so much support from children, with families on low and middle incomes being hit the hardest of all?"

However Treasury Minister Justine Greening said that the Government had taken action to ensure that the burden of tackling the deficit would be borne by those best able to shoulder it

"Labour left behind a complete mess with no plan to deal with it apart from run up more debts for the next generation to pay off. They want to hand over their financial mess to our children, when instead what we need to do is start sorting out the problem now," she said.

"This Government has come up with a credible plan to reduce the deficit which is keeping interest rates lower and managing to ensure that the burden falls on those with the broadest shoulders."

The Institute for Fiscal Studies (IFS) estimates that 750,000 people will start paying 40% income tax, as the threshold drops from £43,875 to £42,475, while National Insurance (NI) contributions are set to rise from 11% to 12%.

The combined payments of income tax and NI will rise by £500 for someone on a £50,000 salary, the IFS said.

Child Benefit payments will be frozen for three years, while the winter fuel allowance will drop from £250 to £200 for those between the state pension age and 79, and from £400 to £300 for those aged 80 or over.

Meanwhile a 5% increase in stamp duty will hit owners of £1 million properties.

According to Credit Action 26 of the tax and benefits changes will have a negative impact, resulting in the average household being £200 worse off. But 13 measures will impact positively on people's finances.

The personal allowance is increasing to £7,475, meaning half a million people will stop paying income tax.

Isa savings limits will be index linked, taking the overall total from £10,200 to £10,680, while people aged over 65 will only have to work for 16 hours a week to qualify for Working Tax Credit, which is down from 30 hours.

Research released last week indicated that workers are more than £1,000 worse off than they were two years ago as their pay has failed to keep pace with hikes in the cost of living.

The average employee has seen the value of their take-home pay dive by £1,088, or 5%, in real terms since the middle of the recession, according to BBC One's Panorama programme.

Chief Secretary to the Treasury Danny Alexander was read a tweet from a Sky News viewer who complained of suffering not just "worse-off Wednesday" but "Thursday, Friday, Saturday, Sunday, Monday, Tuesday and Wednesday" as a result of tax, expenses and wage cuts.

Mr Alexander said: "As a country, we have had a cataclysmic economic problem left to us by the previous government with a huge budget deficit where they left us in a situation where we faced the choice, do we get our public finances back in order or do we face the sort of problems that are affecting other countries in Europe and elsewhere?

"We took the decision that we had to get things sorted out. That, of course, is difficult and it does require some painful decisions.

"What we are trying to do through the tax changes we have announced, on income tax and so on, is at least to try and do something to help people in those difficult times."